Carpe Diem, Reuters, FTalphaville, and WhaleOil are among those calling attention to a new paper by Leonardo Maugeri, senior manager for the Italian oil company Eni, and Senior Fellow at Harvard University, which concluded:

Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption. This could lead to a glut of overproduction and a steep dip in oil prices.

Based on original, bottom-up, field-by-field analysis of most oil exploration and development projects in the world, this paper suggests that an unrestricted, additional production (the level of production targeted by each single project, according to its schedule, unadjusted for risk) of more than 49 million barrels per day of oil (crude oil and natural gas liquids, or NGLs) is targeted for 2020, the equivalent of more than half the current world production capacity of 93 mbd. [After factoring in risk factors and depletion rates of currently producing oilfields], the net additional production capacity by 2020 could be 17.6 mbd, yielding a world oil production capacity of 110.6 mbd by that date.

Here I take a look at some of the details of Maugeri's analysis.

About half of Maugeri's calculated 17.6 mb/d in net additional production capacity comes from two countries-- the United States and Iraq (see his Table 2). I have earlier discussed the situation for the United States. To briefly recap, more than half of the increase in total U.S. oil production since 2005 has come from biofuels and natural gas liquids, neither of which should be added to conventional crude production for purposes of calculating the available supply. Another important contribution to recent U.S. production gains has come from shale/tight oil. I agree with Maugeri that this will be an important factor in the future, but it is not cheap, and there are some big uncertainties in extrapolating recent gains, about which I will have more to say below.

But first let's take a look at Iraq, which by itself accounts for 5.1 mb/d, or 29% of the net combined global gains that Maugeri is anticipating. His starting point for these calculations (see his Table 1) is the "production target" associated with a dozen oil fields for which the Iraqi government has signed contracts with oil companies. These targets call for these fields to reach maximum levels of production which, when added together, come to 11.6 mb/d. To win a contract, oil companies had to specify two key parameters: a "target" level of production and a remuneration per barrel, with awards going to the companies that specified the highest target and lowest remuneration. Some have characterized the announced targets simply as propaganda. Once awarded, there seems to be a separate process in which the production targets get renegotiated. Maugeri acknowledges the logistic and security challenges in meeting the targets, and accordingly cuts the official estimates in half. Doing so would still be a stunning achievement, requiring an Iraq that would be substantially more stable and successful over the next decade than it has been over the last three.

A separate issue is that new production from places like the U.S. and Iraq are needed in part to replace declining production flows coming from mature fields. A key question in any study like this is the assumed magnitude of that decline. As Stephen Sorrell notes, Maugeri does not state his assumed rate, and confuses the issue by mixing discussions of the depletion of an existing reservoir (for which purposes Maugeri is correct to raise the offsetting factor of additions to reserves) with the declining production flow rate from a given field (the relevant number for purposes of calculating the net addition that new fields bring to annual production). Sorrell suggests we can infer the implicit assumed decline rate from Maugeri's Table 2, which reports a difference between his adjusted gross additions and adjusted net additions of 11 mb/d. That seems to imply that Maugeri is assuming that the total decline in production from existing fields between now and 2020 will be 11 mb/d, which I calculate to correspond to a 1.4% annual decline rate (ln(82/93)/9 = -0.014). As Sorrell notes, this compares for example with the IEA's (2008) substantially less optimistic numbers:

Based on data for 580 of the world's largest fields that have passed their production peak, the observed decline rate-- averaged across all fields and weighted by their production over their whole lives-- is 5.1%. Decline rates are lowest for the biggest fields: they average 3.4% for super-giant fields, 6.5% for giant fields and 10.4% for large fields. The average rate of observed post-plateau decline, based on our data sub-set of 479 fields, is 5.8%.

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I agree with Maugeri that new production from places like the United States and Iraq is going to be very helpful. But I think he substantially overstates the case for optimism. If we are counting on sources such as shale/tight oil, oil sands, and deepwater to replace production lost from mature conventional oil fields, the days of cheap oil are never going to return.